The Chancellor sets out to woo world's business

Corporation tax at 22 per cent is designed to lure firms to the UK. Will it work, asks James Moore

In 2010 the Conservatives and Liberal Democrats stated in the agreement that created their coalition: "Our aim is to create the most competitive tax regime in the G20."

According to Oxford University's Centre for Business Taxation, the Chancellor, George Osborne, has gone some way towards doing that with the cuts to corporation tax announced in last week's Budget.

In 2014, when the UK's corporation tax rate will hit a low of 22 per cent, only Saudi Arabia, Russia and Turkey among G20 members will be lower (at 20 per cent, see graphic). As locations for international business, none of them comes free of drawbacks.

In terms of the "effective" tax rate (which includes various other factors), the UK will slip to sixth, with South Korea and Italy just ahead. But Mr Osborne has made clear his desire to cut corporation tax to 20 per cent when it becomes affordable, so a further rise up the rankings could be due – although we should not forget the fact that, by taking a short hop across the Irish Sea, companies can enjoy a 12.5 per cent rate in the Irish Republic.

So how long will it be before the UK sees the benefits of new businesses coming here?

Professor Michael Devereux, the Oxford centre's director, says: "The average rate of corporation tax over the past 30 years has fallen from 47 per cent in the early 1980s to 27 per cent now. We are not the only people reducing tax, but there have been periods of more aggressive competition than we see now.

"We know President Obama has made proposals for a cut in the US, but getting anything done in the States is not easy. One thing that is holding more aggressive competition up is the US and the fact that they have a worldwide tax system. American companies have to top up their rates. Empirical evidence suggests there is a strong correlation between location and tax, so it will have an effect."

He adds: "The issue of Ireland is tricky. In the past, it has attracted large companies – Google, Microsoft, for their European headquarters – but we have lived with that for three decades. The UK has more people, proximity to the City, it's a bigger market. There are lots or reasons to be here.

"It tends to be that larger countries are able to charge higher tax rates because of this."

Stella Amiss, an international tax partner at PWC, also says the tax cut will make a difference for the UK, even with its proximity to Ireland. That is because companies tend to look at an overall package rather than just tax. And our main competitors might not be in a position to respond.

"Companies don't move just on that tax alone and we are never going to go to 12.5 per cent, like Ireland. That doesn't make sense. In the round, the cut really does make the UK a competitive system," she says.

Will other countries follow? "Places such as the Netherlands have incentives in some areas, and theirs are typically more generous than ours.

"But can others afford to respond? We have been doing it gradually. Germany, France, the US, they can't afford to take a hit like 10 per cent in one go."

She adds: "It isn't just tax rates, either. Business will ask, 'Do I have a stable regime?' If you look at France, for example, they are awful. Before Christmas, there were four changes in three months. Comparing France with the UK, it is a no brainer."

Bill Dodwell, the head of tax policy at Deloitte, also says a corporation tax war in response to the UK move is unlikely to happen. At least for now: "I think it is probably worth saying that other countries have a choice to make. Whereas Ireland, in having to raise money, has put up personal tax and VAT to keep its treasured 12.5 per cent rate, countries such as France have done the opposite."

He adds: "For normal countries, the UK has the most competitive tax regime in Europe. It compares very well with France, Germany, Italy and even the Netherlands."

And Ireland? "Ireland is where it is. It has a very competitive corporate regime but it is a very small economy and it doesn't have the advantages we have in the UK."

So it appears that the Chancellor's move is all but risk-free. Competitors don't really have the flexibility to follow suit. Richard Woolhouse, the head of tax and fiscal policy at the CBI, says: "There is a long debate about the so-called race to the [corporate tax] bottom. You've had falling rates around the world for 20 to 30 years. But you haven't seen falling tax receipts."

He also points to GlaxoSmithKline's announcement of plans to set up a new factory in Cumbria as evidence that UK tax policy is working.

"Three or four years ago, companies such as WPP and Shire left despite a middle-of-the-pack tax rate here. There is anecdotal evidence now that companies are not moving, and one or two are coming back. The tax rate is an important part of the shop window to show we are open for business."

Other than Glaxo, how quickly will that window attract customers? With a squeezed and unhappy electorate quietly fuming at the millionaire's tax cut of 5p off the top rate, Mr Osborne needs them before the next election.

Life & Style
Sampling wine in Turin
food + drink...and abstaining may be worse than drinking too much, says scientist
Arts & Entertainment
Kingdom Tower
architecture
Sport
Jose Mourinho restrains his assistant manager Rui Faria, Fabio Borini celebrates his winning penalty and Connor Wickham equalises for Sunderland
sportChelsea 1 Sunderland 2: Deafeat is extra bitter as former Chelsea player Fabio Borini scores late penalty to seal victory
Arts & Entertainment
Game of Thrones writer George R.R. Martin has been working on the novels since the mid-Nineties
books
VIDEO
News
Easter a dangerous time for dogs
these are the new ones. Old ones are below them... news
News
Brand said he
people
Sport
Roger Federer celebrates his victory over Novak Djokovic in the Monte Carlo Masters
sport
Voices
Actor Zac Efron
voicesTopless men? It's as bad as Page 3, says Howard Jacobson
Arts & Entertainment
The monster rears its head as it roars into the sky
film
Voices
For the Love of God (2007) The diamond-encrusted skull that divided the art world failed to sell for
its $100m asking price. It was eventually bought by a consortium
which included the artist himself.
voicesYou can shove it, Mr Webb – I'll be having fun until the day I die, says Janet Street-Porter
Extras
indybestFake it with 10 best self-tanners
Arts & Entertainment
Madonna in her music video for 'Like A Virgin'
music... and other misheard song lyrics
News
Much of the colleges’ land is off-limits to locals in Cambridge, with tight security
educationAnd has the Cambridge I knew turned its back on me?
News
peopleOrlando Bloom the pin-up hero is making a fresh start
News
Who makes you happy?
happy listSend your nominations now for the Independent on Sunday Happy List
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Telesales & Sales Support Apprentice

£221.25 per week: QA Apprenticeships: This company is a well established Inter...

Client Relationship Manager - SQL, Python

£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

**Financial Services Tax**

£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

Day In a Page

How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit